Each month before I prepare the OCHN market newsletter, I think about ways I can improve it and deliver more value to users as my personal commitment to improvement in everything I do. This month, I added a new metric to the report that I believe provides a more intuitive way to look at the current state of the market. I applied the mortgage interest rate to the median home price to backward calculate the monthly cost of ownership for the market. I like this approach because it returns a number immediately comparable to rent.
When I first thought about this indicator, I didn’t think it would reveal anything of value. It’s basically the inverse of the rental parity calculation I already perform. I was wrong. When I plotted out the result, I was astounded to find that the monthly cost of ownership reveals much more about what’s going on than charts of median home prices and rental parity. The first thing I noticed was that the current monthly cost of ownership is comparable to what buyers were paying back at the peak of the late 80s bubble. That shocked me.
The implications of this are eye-opening. If the cost of ownership is the same today as it was in 1989, then all appreciation over the last 23 years is due to a decline in interest rates from 10.77% in April 1989 to 3.5% in October 2012.
Let that sink in for a moment. In April of 1989, the median home price in Orange County, California, was $206,000. With a 10.77% interest rate, the monthly cost of ownership on a median priced home was $1,926 per month. In October of 2012, the median home price in Orange County, California, was $428,000. With a 3.5% interest rate, the monthly cost of ownership on a median priced home was $1,922 per month.
Twenty three years later, and the monthly cost of ownership is the same despite home prices being more than two times higher. Appreciation in California is a bi-product of federal reserve interest rate policies and ever-decreasing interest rates.
The relationship between cost of ownership and rent
The other very powerful tool this analysis provides is the ability to easily compare the cost of ownership to the cost of a rental. Comparing the median home price to rental parity also does this but in a less intuitive manner. The charts below show both views of the market. The top chart shows median home prices, rental parity, and the historically predictive relationship between the two. The bottom chart shows the monthly cost of ownership and the median rent.
Seeing the long-term cost of rental compared to the cost of ownership, it becomes obvious when it was wise to buy and when it was wise to rent. Whenever the cost of ownership breaks its tether to rents, a price bubble is inflated that inevitably leads to a crash. Armed with this information, I hope future buyers will be less prone to overpay and buy into a frenzy. There will always be fools who think it will be “different this time,” but it never is.
At the bottom of each page of the report, I have a graph of the median market rent with a line also showing the current cost of ownership. You can see if the cost of ownership is higher or lower than the cost of a rental, and you can see the trend over the last year.
The cost of ownership bottom
Another thing that jumped out at me when I first did this study was that despite rising house prices, the cost of ownership is still going down in many markets. The impact of rising prices is being cancelled out by falling interest rates. I know many people are worried about missing the bottom or being priced out due to the lack of available inventory. Though the lack of inventory is frustrating, and it is causing prices to rise, the cost of ownership is not rising, so nobody is being priced out of the market. In fact, with the cost of ownership at 1989 levels and below rental parity, houses are as affordable as they have ever been in Orange County.
If you haven’t already done so, if you are considering buying a home in the next year, you should sign up for my monthly market newsletter and start watching the market more carefully. Based on user feedback and my own observation, I will continue to improve this report and deliver more value to help you make a sound decision.
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Proprietary Irvine Housing News home purchase analysis
$849,000 …….. Asking Price
$1,431,000 ………. Purchase Price
5/25/2007 ………. Purchase Date
($582,000) ………. Gross Gain (Loss)
($114,480) ………… Commissions and Costs at 8%
============================================
($696,480) ………. Net Gain (Loss)
============================================
-40.7% ………. Gross Percent Change
-48.7% ………. Net Percent Change
-9.4% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$849,000 …….. Asking Price
$169,800 ………… 20% Down Conventional
3.43% …………. Mortgage Interest Rate
30 ……………… Number of Years
$679,200 …….. Mortgage
$180,083 ………. Income Requirement
$3,023 ………… Monthly Mortgage Payment
$736 ………… Property Tax at 1.04%
$542 ………… Mello Roos & Special Taxes
$212 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$139 ………… Homeowners Association Fees
============================================
$4,652 ………. Monthly Cash Outlays
($669) ………. Tax Savings
($1,082) ………. Equity Hidden in Payment
$182 ………….. Lost Income to Down Payment
$126 ………….. Maintenance and Replacement Reserves
============================================
$3,209 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$9,990 ………… Furnishing and Move In at 1% + $1,500
$9,990 ………… Closing Costs at 1% + $1,500
$6,792 ………… Interest Points
$169,800 ………… Down Payment
============================================
$196,572 ………. Total Cash Costs
$49,100 ………. Emergency Cash Reserves
============================================
$245,672 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Cost of Ownership Analysis
Are you ready to make an offer, but you are worried the cost of ownership is really more than you can afford? Don't make a mistake that might cost you the family home, your life savings, and your good credit! Get the advice of a seasoned professional. Contact us at info@ochousingnews.com today!
We produce detailed reports showing the cost of ownership based on the most likely transaction price and current financing terms. You will know how much you will spend each month in out-of-pocket expenditures and the true monthly cost of ownership factoring in tax deductions, loan amortization, and opportunity costs on your down payment. In addition, we show you how this cost compares to a rental of equal quality to make sure buying is the right decision for your situation.
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Are you ready to make an offer, but you are worried you will either (1) underbid and miss the property or (2) overbid and pay too much? Don't make a mistake and miss your dream home, or worse yet, overpay for it! Get the advice of a seasoned professional. Contact us at info@ochousingnews.com today!
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C.A.r. Survey Finds Short Sales Less Frustrating, but Still Difficult
The short sale process, while still difficult, is becoming a little less frustrating, according to a Lender Satisfaction Survey conducted by the California Association of Realtors (C.A.R.).
The trade organization reported 64 percent of California Realtors expressed difficulty in closing short sales, an improvement from 77 percent in August 2011 and 70 percent in 2010.
However, the more significant improvement was the drop in Realtors who described the short sale process as “extremely difficult.” More than half (56 percent) of the Realtors surveyed in 2011 said the process was “extremely difficult” compared to about a third (34 percent) in 2012.
The survey is based on Realtors’ most recent short sale transaction.
“While it’s encouraging that lenders and servicers are making headway in improving their short sale processes, they still have more work to do to ensure that not only REALTORS®, but also home sellers and buyers have a better experience when dealing with short sales,” said C.A.R. President LeFrancis Arnold.
Overall satisfaction with lenders during the short sale process improved, with 28 percent expressing satisfaction in 2012, compared to 16 percent in 2011. A smaller share was also dissatisfied, with 59 percent expressing dissatisfaction, down from 75 percent in 2011.
In addition, more than six in ten Realtors said they would not refer buyers to the lender for future home purchases, down from 78 percent in 2011.
Among the main obstacles Realtors faced, a lender’s slow response time to a short sale package was the most cited, with 67 percent of Realtors marking it as an issue, according to the survey.
Poor communication with the lender representative was the second most cited obstacle, with 55 percent of Realtors selecting it as an issue. Half of the Realtors also said repeated requests for documentation hindered them as well.
Other obstacles included a buyer backing out or long negotiations (32 percent), problems with second lien holders (23 percent), and a lender foreclosing on a borrower before the transaction is completed (8 percent).
The GSEs and Bank of America have addressed some of the issues through changes to their short sale process.
“A recent change announced by the Federal Housing Finance Agency (FHFA) to align Fannie Mae and Freddie Mac short sale guidelines will allow lenders and servicers to quickly and more easily qualify borrowers for a short sale, further improving the process,” said Arnold. “C.A.R. has long advocated for a standardized short sale process, and agreeing to a more standardized process may be the best way for banks, servicers, REALTORS®, and homeowners to facilitate the sale of homes that qualify.”
The survey also included a recently developed Lender Performance Index (LPI), which measures how satisfied a Realtor is with a lender.
With 50 as the median, the index stood at 23 in 2012, up from 17 in 2011 and 16 in 2010.